Underwriting Q&A: Does a Tax Lien Deed of Trust have priority over a lien filed of record prior in time? (TX)

A: Yes.

While we may have covered this subject in past blog topics or bulletins, we continue to see claims filed wherein a tax lien deed of trust was not properly reflected as a Schedule C requirement on the title commitment and thus not paid at closing. This is often due to removing the tax lien deed of trust based on the foreclosure of a prior recorded deed of trust.

A state ad valorem tax lien is a super-priority lien which takes priority over the claim of any creditor of a person whose property is encumbered by the lien, including purchase money lien holders, and over the claim of any holder of a lien on property encumbered by the tax lien, whether or not the debt or lien existed (i.e. filed of record) before attachment of the tax lien, except that – Such tax lien is inferior to claims for (i) any survivor’s allowance and funeral expenses, (ii) under a recorded restrictive covenant running with the land, other than in favor of a property owners’ association, recorded before January 1 of the year the tax lien arose, or (iii) under a valid easement of record recorded before January 1 of the year the tax lien arose. (Texas Tax Code 32.05(b)(c)). It is a determination of federal law as to whether a state tax lien has priority over a federal tax lien. (Texas Tax Code 32.04(a)).

Texas law permits property tax lien transfers, wherein an owner of real property consents by written agreement to the payment of their real property taxes by a third party, to whom the taxing unit then transfers its tax lien. (Texas Tax Code 32.06(a)). Non-institutional and often times private lenders typically make property tax loans to owners for the payment of delinquent property taxes, and in conjunction receive an assignment or transfer of the ad valorem tax lien. Additionally, the property owner grants the property tax lender a tax lien Deed of Trust to secure repayment of the lien, which must be recorded in the appropriate county real property records. When the tax lien is transferred to the lender and secured by a tax lien deed of trust properly filed of record, the lender steps into the shoes of the taxing entity and the tax lien deed of trust maintains a super-priority position, notwithstanding that it is filed of record later in time. For example, the foreclosure of a purchase money deed of trust secured against the property filed of record prior to the tax lien deed of trust would not extinguish the tax lien deed of trust. In this example, the tax lien deed of trust must be reflected as a Schedule C requirement as a lien to be paid and released at closing.

As always, should you have any questions please do not hesitate to contact an FNTI underwriter.